David Lawson 2002
Poland slips easily into cliché. Wartorn, unstable, pawn of competing power blocks, the victim of endless friction between east and west. But a new world order has almost erased the old prejudices. Almost.
The collapse of a power pact named after the capital, Warsaw, is still too recent to entirely embrace western investment standards but the country’s border role has ironically become its greatest asset. To fall back on another cliché, it is the crossroads of a new Europe, linking cash-rich western nations with the investment-hungry east.
The great talking point is when, rather than if, Poland joins the European Union. A planned timetable for 2004 may careen off-course as other countries waver but Warsaw will continue to be seen as the natural focus for interchange. ‘Joining NATO was a far more important event,’ says Noel Manns of European Capital Partners. ‘That welded the country into the West.’
It helped unleash a tide of interest among those bold enough to get in early. The UK, as ever, is barely represented other than a clutch of top consultancies and retailers but others are not so restrained. US names like Hines, Apollo and Heitman have made deep inroads. Central European Retail Property Fund [CERPF], which has just opened Wola Park, the biggest retail/leisure scheme in Poland has some UK input via Jones Lang LaSalle but is seen as a dollar vehicle. The Dutch are active through Rodamco and IG. German and Austrian investors are spilling across local borders and Israeli expats are sending money ‘home’. Denmark’s biggest developer, TK, is creating two giant shopping centres, while even the Belgians are building big.
But there is a downside to EU entry, no matter when it comes. Firstly, the sheer enthusiasm is causing problems. ‘This is an immature market. Small changes in supply can have a major effect,’ says Peter Wislocki of architect Aukett Polska, which is heavily involved with TK’s centres and the 15,000 sq metre Saski Crescent central office development for AIG/Lincoln.
Some insiders fear retail developers could have already gone overboard. ‘We are heading for disaster,’ says Adam Murza-Murzicz, a familiar name in London during his years as editor of Estates Times and then a property analyst. Now chairman of developer Mysia5 in Warsaw he points out that there are 20 superstores in Warsaw, a small city by world standards with fewer than 2m people. ‘Incomes are also a fifth of the UK and unemployment runs at 20%,’ he says.
Some think that is too simplistic a view. ‘You can’t just aggregate figures,’ says Gareth Jones, head of central Europe Capital Markets at Jones Lang LaSalle. Early hypermarket-centred schemes may suffer but there will be a strong market for the latest generation of malls.
TK is betting on this with a series of new centres including Reduta Park in Warsaw, where an extra 11,000 sq metres is being created. So are some big investors. GE and Heitman have paid more than 200m Euro for 13 Polish shopping malls and intend backing the local developer, Domy Towarowe Casino, in a major programme of redevelopment and expansion of existing and new retail centres.
The point they make is that location and quality will be critical to the international retailers fighting for first bite of the market. Sean Briggs of CERPF says this is why 85% of Wola Park pre-let and rents have been achieved of 65 Euro/sq metre. Wisloki adds: ‘Investors are cautious but we see clear evidence of major players like AIG/Lincoln hunting for further sites.’ They are land-banking to take advantage of what they see as a return of confidence once EU entry is clarified.
Many of these will be mixed schemes around the fringes of Warsaw along major roads and include hotels, leisure and warehousing. The key to success will be timing. One Aukett client just bought 173 hectares in the knowledge that it could take several years to develop.
Murza insists offices have more immediate potential. ‘Anyone who doesn’t get in during the next two years will miss the boat,’ he says. Which is why he is heading up a new company in partnership with German developer Von der Heydeon to create 11,000 sq metres out of the old Polish Press Agency site in the city centre. A third has been pre-sold back to the PPA, a quarter pre-let to multiple tenants and the rest under discussion at rents of $29/sq metre.
There is room for another 2m sq ft of space in Warsaw to meet the surge of demand from occupiers when Poland joins the EU, he says. Supply has remained limited because old suspicions remain about short leases structures and problems indexing returns to a still-suspect currency. This is proving a great frustration to investors. ‘One fund with $500m available kept back $200m because it could not find the right product,’ says Murza.
One indicator of the shortage is that only 15% of take-up took place in the city centre during the first six months of this year, says Cushman & Wakefield Healey & Baker. This is not just that Warsaw lacks the kind of central business district which dominates other capitals but the fact that so little is being built. Most of the modern space is further out – and at lower rents. New supply nearly doubled in the second quarter of this year to 77,000 sq metres but nearly 90% was non-central.
Even here, there is a reluctance to commit without pre-lets. Belgian developer Liebrecht & Wood has plans for 40,000 sq metres of high-specification offices out on the fringe but Wislocki says this is unlikely to come out of the ground until conditions are right. ‘It may be six months. It may be 18 months.’
Meanwhile, investors paw the ground with frustration. They see huge potential capital gains for those who invested in the Nineties at yields of 12.5% to 15% once Poland moves closer to the West. But many are unwilling to translate that into direct development.
‘The market is not in too great a shape. Absorption is low, rents are falling and there will be a lot of churn as tenants move to better buildings,’ says Seth Martin, a senior associate with Apollo. That has not reduced interest in its partnership with local developer Rida, which is involved in $800m of schemes across Poland, but led to a shift away from development towards buying.
But there are relatively few institutional-standard buildings available. ‘Stable assets and good tenants are rare, and they don’t come cheaply - if at all,’ says Martin. The competition is also heating up, with DGI heralding the entry of German funds into the market when it paid $30m for the Kopernik office development this year.
Giles Wilcox of C&W H&B, which brokered the deal, says the huge cash flows into German open-ended funds will increase the fierce demand as they eye prime office yields of 10% - well above those in other central European capitals let alone West European markets. He forecasts diversion into tertiary areas like hotels and car parks.
Apollo has not yet abandoned offices, however. ‘The key will be finding distressed Grade A assets that can be turned around,’ says Martin. Attention is currently focussed on Warsaw Trade Tower, the 43,000 sq metre former headquarters of Daewoo, to slot into the manager’s $250m International Real Estate Investment Fund. ‘This is typical of what we can do as it has lots of complexities,’ he says.
Other investors are casting their net beyond the city’s uncertain office market. ‘Warehousing will be the key sector to watch,’ says Murza. ‘Poland is the crossroads of Europe. When the country merges with the EU it will bring a massive increase in road spending and cross-border trade. But we have only a dozen or so modern developments.’
King Sturge points out it is not quite that bad, with around 966,000 sq metres of modern warehousing in the Warsaw area. But the consultant admits that figure is ‘considerably less than one might expect’. In fact, the potential gateway to the East has a mere fifth of the per capita space of some west European cities. Distributors have been making big strides to modernise. Poland has proportionately more modern space occupied by big name third-party logistics providers than anywhere else in Europe, says King Sturge.
Development has also surged, with most of the modern stock emerging over the last three years. Investors have naturally taken notice. Noel Manns of European Capital Partners has been looking at a couple of deals for some time at target yields of 11-12%. But the very surge of development has caused problems. King Sturge says vacancy rates are up and rents have been falling as landlords try to fill space. It should, however, be back in balance by the end of the year.
That won’t help investors like Manns if sellers cannot accept that these buildings are now over-rented. ‘It can be hard to thrash out an acceptable value,’ he says. He, like Apollo, is inclined to look for older buildings that can be massaged to provide added value. One of the main opportunities could be occupiers overwhelmed by industrial change and starved of capital. Refinancing and outsourcing is ripe for expansion. The problem will be finding bricks and mortar that can meet institutional standards – a hard enough task in advanced European economies, let alone the neglected wastes of central Europe.
The sheer pressure of demand from both occupiers and cash-rich western funds will drive through changes, with some analysts seeing vast distribution centres being created for third-party operators on brown and greenfield sites around Warsaw. These will serve not just central Europe but link German manufacturing giants with the vast potential market of the former Soviet Union and Baltic states. The traffic will not be all one-way, as manufacturing centres are set up to take advantage of low wage levels.
It won’t all be smooth sailing. ‘People are assuming that joining the EU will be the final barrier,’ says JLL’s Jones. ‘It won’t. The critical factor is how quickly Poland adapts to meet European levels afterwards.’ Shadows still hang over the market because the government has failed to sort out claims for property restitution going back to wartime and Soviet occupation. It also continues to muddy the waters with development taxes.
If these can be solved, Warsaw will finally shake off its reputation as a victim in the endless collisions between east and west, becoming instead the hub for Greater Europe, with all the benefits a crossroads can accumulate.